Buying a franchise business

By
Real Estate Agent with Humber Valley Realty

Aside from the type of business being purchased (which is entirely seperate topic specific to that business) if the business you are planning on buying is a franchised business, issues arise such as the term of the franchise agreement, royalty rate and the scope of the exclusive local territory (if applicable).

In Ontario, two important issues to consider when purchasing or selling a franchise is the "fair dealing" and disclosure requirements of Ontario's franchise legislation.

Essentially, the legislative requirements (recently introduced) require franchisors to provide franchisees with relevant and meaningful information concerning the franchise to be purchased - such as the background information on the individuals managing the franchise system. This information must be provided before the franchisee makes an investment in the franchise.

Disclosure obligations

A disclosure document must be delivered to the franchisee fourteen days before he/she enters into any agreement related to the purchase of the franchise or transfers any money related to the proposed purchase.  Some important details that the disclosure document must include are:

  • material facts relating to the franchise operation;
  • proposed franchise agreements;
  • statements that assist the prospective franchisee in making the decision of purchasing the franchise; and
  • financial statements where applicable.

The information set out in the disclosure documents must be accurate, clear and concise. Timing of delivery of the disclosure document is very important as late delivery or non-delivery can give rise to a release from contractual obligations.

There is also an obligation on the franchisor to provide the franchisee with ongoing information and to highlight any material changes that occur between the delivery of the disclosure documents and the signing of the franchise agreement. This is called "Rolling Disclosure" or open ended disclosure. Failure to do this may lead to important legal consequences to the franchisor.

Directors and persons signing the disclosure document on behalf of the franchisor may also face personal liability in certain circumstances.

Buying an Existing Franchise

If buying an existing franchise, apart from obtaining proper disclosure from the franchisor, there are other important issues you should investigate before completing the transaction which is saved for another discussion.

Conclusion

Buying any business requires thoughtful consideration.  Buying a franchise can be an even more complicated process in many cases.  More importantly, when buying a franchise, remember that not only are you buying a business, you are agreeing to enter an on-going relationship with a Franchisor and it's system which impact you well beyond closing.  The issues above are only a handful of example issue that one must consider.

On a personal note, I have been principally involved in a number of franchises and I cannot stress this last point strongly enough.  Suffice it to say, the assistance of professional advisors is strongly encouraged in contemplating such an important decision.

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